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Yahoo: Phoenix or Zombie?

Well before Microsoft and Yahoo started discussing a merger that later fell apart, the venerable search engine seemed a little lost in its journey to an uncertain future. As we look at the latest news surrounding Yahoo, we can ponder what kind of soul stands revealed by the company; is it a phoenix or a zombie? Will the deal with Google save it – and if not, what’s next?

The legend of the phoenix states that the bird, after having lived a long life, dies in a fire, only to rise from the ashes, young, energetic and reinvigorated, better and stronger than when it entered the flames. A zombie, of course, is a shambling undead creature, hardly more than the shell of the human it once was, eternally hunting for brains. The question is, which one is Yahoo?

We know how Microsoft CEO Steve Ballmer might answer that question. When he and Yahoo CEO Jerry Yang could not agree on a purchase price for Yahoo, Ballmer walked away from the deal. This inspired Carl Icahn, billionaire and activist holder of Yahoo stock, to go to war against the search engine in an attempt to push his own slate of candidates onto the company’s board of directors – a slate that would pursue Icahn’s agenda to rekindle discussions in the hope that the software giant could be persuaded to purchase Yahoo after all. Perhaps he would agree with Ballmer’s assessment that Yahoo isn’t worth nearly as much as Yang and certain others seem to think.

So is Yahoo turning into a zombie, then? Sadly, recent events would seem to confirm this. But they don’t tell the full story. Yahoo has a history and some real staying power; it is one of the few companies that went through the fire caused by the tech bubble bursting about seven or eight years ago, and came out the other end relatively intact. Let’s look at the current state of the search engine, and see if we can sift out some hope from the ashes.

{mospagebreak title=Brains Needed}

Unfortunately, it’s easy to imagine Yahoo as a shuffling undead being searching for brains given the search engine’s brain drain. According to TechCrunch, the company has lost at least 50 executives since January 2007. Judging from the latest press reports, the exodus has been accelerating in recent weeks.

It’s gotten so hard to keep up with the reports that at least one observer started a spreadsheet. Some analysts have said that no one who has left is truly a superstar that Yahoo can’t possibly do without. On the other hand, the latest spate of departures shook up a number of people, and rightly so, as they represent some of Yahoo’s more visible personnel.

The one that caught my attention was Jeremy Zawodny. One of the most visible Yahoos because he keeps a blog in which he talks about the company, Zawodny used it on June 12 to confirm rumors he was leaving. One week later, from the same vehicle, he revealed his new place of employment: Craigslist. Zawodny had been with Yahoo eight and a half years. It was almost as if Matt Cutts had announced he was leaving Google.

Some more recent but equally visible Yahoos are also leaving the company. Joshua Schacter, the founder of the del.icio.us social bookmarking service, which Yahoo acquired in 2005, is leaving at the end of June. Likewise, Stewart Butterfield and Caterina Fake, co-founders of Flickr, another successful site which Yahoo purchased in 2005, are leaving.

Plenty of “regular” executives are leaving as well. Jeff Weiner, executive vice president of Yahoo’s network division, is also quitting. Qi Lu, executive vice president of engineering for search and advertising technology, is turning in his badge as well. And there’s a whole lot more leave-taking going on. To the list of quitters, add Usama Fayyad, chief data officer and executive vice president of research and strategic data solutions; Vish Makhijani, senior vice president of search; and Jason Zajac, who can include on his resume the titles of general manager of social media, head of finance for the audience division, and vice president of corporate strategy.

Next to Zawodny, though, the person leaving Yahoo whose name is most likely to be recognized by outsiders is Brad Garlinghouse, senior vice president of communications and community. He was also the author of the notorious “Peanut Butter Manifesto,” an email leaked to the press that said, among other things, that Yahoo is spreading itself too thin with the number of things with which it has gotten involved. Perhaps Yahoo agrees; the deal it has made with Google will take off some of the advertising pressure and give it the revenue to refocus its efforts on search. But I’m getting ahead of myself.

{mospagebreak title=Yahoo and Google Shake Hands}

The deal between Google and Yahoo was announced in early June. According to the terms of the deal, Yahoo will outsource part of its search advertising business to Google. Specifically, the deal covers the US and Canada. But will it help Yahoo? And was it worth turning down Microsoft?

At least some at Yahoo think it will be highly lucrative. The additional $250 million to $450 million in cash flow it is expected to generate is nothing to sneeze at. But just how much of Yahoo’s advertising will be replaced by Google’s? Yahoo president Sue Decker gave no estimates, but said that Google’s ads would show up mostly for long tail results, where Yahoo is weaker than Google because Google’s advertising base is larger.

Google clearly benefits from this deal, but Yahoo’s gains may be short-term at best. If advertisers know that their ads may show up on both Yahoo and Google if they advertise with Google, why would they choose to advertise exclusively with Yahoo? Indeed, some might even question Yahoo’s intentions to remain in the search ad market. “This partial outsourcing is going to be greeted by marketers as a confusing message about whether they’re in this for the long term,” noted Bryan Wiener, CEO of 360i, a New York digital agency.

But Yahoo may get something even worse than a mere short-term benefit out of the deal with Google: the scrutiny of the US Department of Justice and the US Senate’s Antitrust Committee. Committee Chairman Herb Kohl (D-WI) noted that “This collaboration between two technology giants and direct competitors for internet advertising and search services raises important competition concerns. The consequences for advertisers and consumers could be far-reaching and warrant careful review, and we plan to investigate the competitive and privacy implications of this deal further in the Antitrust Subcommittee.”

The two search engines allowed for a three-and-a-half month “window” on the deal so that the appropriate authorities could examine it for any competition irregularities. With Google owning about 68 percent of the US search market, and Yahoo maintaining a dominant position for Internet display ads, adding this kind of padding to the time table must have seemed only prudent. The deal also contains provisions designed to appease regulators; it is not exclusive, so Yahoo can choose to form other search advertising agreements, even with Microsoft. It also allows Yahoo to use Google’s ads at its own discretion. Whether that will be enough to appease the Department of Justice remains to be seen.

{mospagebreak title=Yahoo’s Future}

So, between the brain drain and the potential long-term down sides of its advertising deal with Google, has Yahoo let itself in for a future in which it is hardly more than a mindless shell? Anyone who thinks that doesn’t realize what Yahoo still has going for it. Danny Sullivan pointed out Yahoo’s many assets in a recent post on Search Engine Land. These include the following:

Profitability. According to SEMPO, 70 percent of advertisers buy through Yahoo’s Panama paid search system. Compare that to the 50 percent who use Microsoft’s system, and suddenly we see one reason why the software giant originally wanted to buy the search engine.

Search Share. Sure, Google is dominant, but Yahoo easily out competes Microsoft for the number two spot.

Great Properties. Yahoo Finance. Flickr. Yahoo Answers. Del.icio.us. Yahoo Mail. Yahoo News. Yahoo Search. And let’s not forget one of the newest features, Yahoo Buzz. Every single one of these properties boasts plenty of users and brand recognition as a strong offering in its niche.

Brand recognition. This time, I’m not talking about the properties; I mean the Yahoo brand in general. Quick, name Microsoft’s search engine. Is it MSN or Live? Or Microsoft Live? Or MSN Live? Sure, ask a professional SEO and they can tell you, but what about the general public?

After noting these good points, Sullivan observed that Yahoo faces three challenges: the outstanding success of Google, the desperation of Microsoft as it flounders around in a distant third position after a decade of trying, and bad leadership in the form of former CEO Terry Semel and the decision to own content. Sullivan concedes that Yang’s leadership over the past year is also at fault.

So how can Yahoo solve its problems? Well, the latest reorganization, announced at the same time as the new spate of executive leave-taking hit the media, is supposed to be more than a mere reshuffling this time. That might help. Sullivan thinks the company needs to refocus and get back to what made it great: search. “That means robbing Google,” he observed. “I mean since Google and Yahoo are all buddy-buddy again, it’s not even like treason!” He even suggested spinning off Yahoo’s search property and turning it into a start-up again, to try to recapture some of the magic and energy.

Would that work? It sounds very much like a corporate version of trying to find a phoenix and help it rise from the ashes. It might not take something this extreme to reinvigorate Yahoo, but lesser approaches seem not to have worked. How far will Yahoo go? There’s no telling, but either way, we will see what emerges from the fire this time.